Under Obama's Proposal, Top Tax Rates Would Actually Be Higher Than Clinton-Era Levels

Mamta Badkar|Dec. 10, 2012, 4:43 PM|215|1

Charles Dharapak/AP

In pushing to end Bush-era tax cuts, president Obama has argued that top taxes would only revert to levels seen during the Clinton years.

But in a Bloomberg View column, Alan D. Viard of the American Enterprise Institute argues that this isn't quite accurate because there is a new tax that will come into effect next year that didn't exist during the Clinton era.

Specifically, under Obamacare, those with incomes of over $200,000 ($250K for couples) will have to pay the unearned income Medicare Contribution Tax – a 3.8 percent tax on interest, dividends, capital gains, rents etc – that will come into effect on January 1.

There are a few problems with the tax.

But the biggest problem according to Viard is that it punishes savers:

"The biggest issue, however, is the additional penalty the tax will impose on the savings that finance investment and fuel long-run economic growth. It’s true that relatively few Americans have high enough incomes to be subject to the tax. But they account for a large portion of what the nation saves, magnifying the economic impact.

IRS data for 2010 reveal that the 3 percent of taxpayers with incomes of more than $200,000 received 45 percent of the interest income, 58 percent of the dividends and 88 percent of the capital gains (net of losses). More taxpayers and more saving will gradually become subject to the unearned income Medicare contribution tax in coming decades because its income thresholds won’t be adjusted for inflation.

Even if the high-income portions of the 2001 and 2003 tax cuts are fully extended, the unearned income Medicare contribution tax’s arrival next year will raise the top rates on interest, dividends and capital gains 3.8 percentage points above this year’s levels. Or, if the high-income provisions are allowed to expire, it will push the top rates on interest, dividends and capital gains 3.8 percentage points above Clinton- era levels."

Under Obama's Proposal, Top Tax Rates Would Actually Be Higher Than Clinton-Era Levels

Mamta Badkar|Dec. 10, 2012, 4:43 PM|215|1

Charles Dharapak/AP

In pushing to end Bush-era tax cuts, president Obama has argued that top taxes would only revert to levels seen during the Clinton years.

But in a Bloomberg View column, Alan D. Viard of the American Enterprise Institute argues that this isn't quite accurate because there is a new tax that will come into effect next year that didn't exist during the Clinton era.

Specifically, under Obamacare, those with incomes of over $200,000 ($250K for couples) will have to pay the unearned income Medicare Contribution Tax – a 3.8 percent tax on interest, dividends, capital gains, rents etc – that will come into effect on January 1.

There are a few problems with the tax.

But the biggest problem according to Viard is that it punishes savers:

"The biggest issue, however, is the additional penalty the tax will impose on the savings that finance investment and fuel long-run economic growth. It’s true that relatively few Americans have high enough incomes to be subject to the tax. But they account for a large portion of what the nation saves, magnifying the economic impact.

IRS data for 2010 reveal that the 3 percent of taxpayers with incomes of more than $200,000 received 45 percent of the interest income, 58 percent of the dividends and 88 percent of the capital gains (net of losses). More taxpayers and more saving will gradually become subject to the unearned income Medicare contribution tax in coming decades because its income thresholds won’t be adjusted for inflation.

Even if the high-income portions of the 2001 and 2003 tax cuts are fully extended, the unearned income Medicare contribution tax’s arrival next year will raise the top rates on interest, dividends and capital gains 3.8 percentage points above this year’s levels. Or, if the high-income provisions are allowed to expire, it will push the top rates on interest, dividends and capital gains 3.8 percentage points above Clinton- era levels."